Joint work with Soumya Sen. Revise and Resubmit at ISR.

Abstract

On numerous digital platforms, like Xbox Game Pass and PlayStation Now, both first-party and third-party content developers collaborate to produce content for a subscription package. The resulting revenue is then shared between these parties. Platform functionality, represented by aspects like Software Development Toolkits or hardware features, serves as a strategic lever to aid content creation. This, in turn, impacts other platform decisions, including revenue-sharing and first-party content quality. Given the substantial investments and potential opportunity costs tied to platform functionality, first-party content development, and revenue-sharing, platforms must astutely coordinate these strategic levers to effectively manage their ecosystems.

We present a detailed model accounting for platform functionality, revenue-sharing, and first-party content quality as decision variables. Our analysis reveals critical insights for platform operators. Firstly, we identify the circumstances under which platform functionality exhibits non-linear effects on strategic levers, such as revenue-sharing, in both positive and negative directions. Typically, platforms with richer functionality benefit from sharing more revenue. However, when platforms can improve first-party content quality at a significantly lower cost than third-party developers, those with enhanced functionalities are better off sharing less revenue. Secondly, we illustrate that a platform's balance between investing in its own functionality and deciding on revenue-sharing is influenced by the asymmetry in content quality improvement costs. When the cost to improve first-party content quality falls, platforms initially reduce revenue-sharing and curtail functionality investments. Yet, as the first-party content developer gains a marked advantage, platforms continue reducing revenue-sharing but increase functionality investments. Our findings shed light on the intricate dynamics of platform decisions, offering invaluable guidance for platforms, both established and emerging, in coordinating their strategic levers.